Securitization Market
The securitization market is a segment of the capital market where securitized assets are issued and traded. Securitized assets are securities backed by pools of underlying assets, such as accounts receivable, mortgages, loans, credit card receivables, auto loans, student loans and other types of assets.
The securitization market provides a source of funding and liquidity for originators, as well as a source of investment and risk diversification for investors. The securitization market also helps to improve the efficiency and stability of the financial system by transferring credit risk from originators to investors.
The securitization market is a global and dynamic market that varies in size and activity across different regions and asset classes. According to the Securities Industry and Financial Markets Association (SIFMA), the global securitization market outstanding was $11.4 trillion as of the end of 2020, with the US accounting for $9.6 trillion, Europe accounting for $1.2 trillion, and Asia accounting for $0.6 trillion.
Accounts receivable securitization is a type of securitization where the underlying assets are trade receivables, which are amounts owed by customers to a business for goods or services delivered. Accounts receivable securitization can help businesses to improve their cash flow, reduce their credit risk, lower their financing costs, and enhance their balance sheet.
Accounts receivable securitization is a relatively small but growing segment of the securitization market. According to Moody’s Investors Service, the global issuance of accounts receivable securitization was $18.8 billion in 2020, up from $16.7 billion in 2019, with the US accounting for $12.8 billion, Europe accounting for $3.8 billion, and Asia accounting for $2.2 billion.
Two of the key parties involved in securitization are the deal arrangers and the book runners. They are usually investment banks that provide different services and functions throughout the securitization process.
Deal Arrangers
Deal arrangers are responsible for designing and structuring the securitization transaction, including the selection of the assets to be securitized, the creation of the special purpose vehicle (SPV) that will issue the securities, the determination of the cash flow allocation and credit enhancement mechanisms, and the negotiation of the terms and conditions with the originator, the investors and other parties.
Deal arrangers also provide accounting, regulatory and tax advice to ensure that the securitization transaction meets the relevant requirements and objectives of the originator and the investors. They may also perform due diligence on the assets to be securitized, such as verifying their quality, performance and eligibility.
Deal arrangers may work with other parties, such as lawyers, rating agencies, trustees and servicers, to facilitate the execution and closing of the securitization transaction.
Book Runners
Book runners are responsible for marketing and distributing the securities issued by the SPE to investors. They are also known as lead underwriters or lead managers. They assess the market conditions and demand for the securities, and determine the initial value and quantity of the securities to be sold.
Book runners may syndicate with other underwriting firms to reduce their risk and broaden their distribution network. They may also coordinate with other book runners in case of multiple lead underwriters involved in a securitization transaction.
Book runners are in charge of the books, which are the records of the orders and allocations of the securities. They manage the book-building process, which involves soliciting and collecting bids from potential investors, and allocating the securities among them. They also provide pricing and settlement services to the investors.
Book runners may also provide ongoing services to the investors, such as periodic reporting, investor relations and secondary market support.
Lead Underwriters
Lead underwriters are another term for book runners, as they are the primary underwriters or lead coordinators in the issuance of new securities. They are in charge of the books, which are the records of the orders and allocations of the securities. They also play the most important role in the transaction and typically retain the most significant portion of the securities for themselves.
Lead underwriters may also be called lead arrangers or lead managers, depending on the context and the type of security issuance. For example, lead arrangers are more commonly used for debt securities, such as bonds or loans, while lead managers are more commonly used for equity securities, such as stocks or warrants.
Syndication
Syndication is the process of forming a group of underwriters to share the risk and responsibility of issuing new securities. Book runners or lead underwriters may syndicate with other underwriting firms to reduce their risk and broaden their distribution network.
Syndication allows book runners to diversify their exposure and access more potential investors, especially for large or complex securitization transactions. Syndication also helps book runners to comply with regulatory requirements, such as antitrust laws or market concentration limits.
Syndication involves dividing the securities among the underwriting firms according to their participation level and role. The book runner or lead underwriter is usually listed first among the other underwriters participating in the issuance, followed by co-managers, senior co-managers, co-lead managers and selling group members.
Conclusion
Deal arrangers and book runners play important roles in the securitization process, as they provide various services and functions to the originator, the SPV and the investors. They work together to ensure that the securitization transaction is successfully executed and closed, and that the securities are properly marketed and distributed. By doing so, they help facilitate the flow of capital and risk in the financial markets.
